Kusserow’s Corner: OIG Reports Many States are Cheating the Federal Government by Inflating Federal Share of Medicaid

The HHS Office of Inspector General (OIG) has found that in addition to providers cheating federally-funded programs, so have many states. Since the Medicaid program was established, the costs and responsibilities for administering it have been shared between the states and the federal government, according to an established formula. The OIG has repeatedly found state policies that deliberately distort the cost-sharing arrangement through “loop holes,” causing the federal government to pay more than its share of Medicaid expenditures, without any benefit to beneficiaries.

Medicaid is a rapidly expanding program that provides health coverage for nearly 60 million Americans today. State policies that inflate federal costs for Medicaid are not a new trend; the OIG identified this issue in a series of reports from the early 2000s focusing on hospitals and nursing homes. These reports found numerous examples in which states developed creative funding mechanisms to apply money from intergovernmental transfers—between government entities—to the states’ share of Medicaid costs, thus driving up the amount the federal government would have to match. States transferred the additional federal Medicaid money to their general treasury funds to use for a range of purposes with no direct link to improving quality of care or increasing Medicaid services. In essence, the intergovernmental transfers reduced the states’ share of Medicaid costs and provided them with money to apply for whatever purposes they wanted by gaming the matching formula so the federal government would pay significantly more than its share. The OIG has seen numerous examples in which states then redirected that additional money for other purposes while medical facilities remain underfunded.

Although over the years CMS and Congress initiated a number of changes to close loopholes that have produced some improvements, other potential loopholes remain. The OIG cited many examples of gimmicks to transfer Medicaid costs to the federal share. Collectively, the findings of the OIG suggest a need for a definitive regulation linking Medicaid payments to the actual cost of service. For years, the OIG has recommended that CMS seek this legislative change to strengthen its ability to curb the wasteful federal spending that occurs when states claim reimbursement for excessive payments. One unsaid difficulty in seeking legislative action is that legislators from many of the states engaged in cheating the federal government are reluctant to close loopholes that will lead to their states having to bear the legitimate burden of their share of Medicaid. This in effect would add liability of billions of dollars to the state taxpayers, instead of the federal taxpayer. Many Congressmen and Senators are loathed to do that, even though it is the right thing to do.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.